Tax credits you won’t want to miss

Credit where it’s due: Energy, adoption, education, retirement

LOS ANGELES (MarketWatch) — American taxpayers may not be getting as much credit as they deserve and they definitely aren’t getting as many tax credits as they used to, but here are six different types of tax credits worth a lot of money — so get your credits if they’re due.

Residential energy credits

Taxpayers who insulated their homes and installed double-paned windows were disappointed at the reduced tax credit they received this year. Instead of the generous $1,500 credit they were expecting, they ended up with only $500.

For 2011, the credit dropped from 30% to 10% of expenditures for adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems. In addition, there is a lifetime limit on these credits of $500 on Part I of Form 5695. So anyone whose has insulated in the past, may insulate no more — at least not for federal tax credits. However, it is worthwhile checking with your state and local governments and utilities to see if they offer any credits.

Incidentally, be careful about sealing up your home too much. Andrew Kalman of Panorama Home Improvement Co. in Long Beach, Calif. warns that people are starting to get sick because of the fumes trapped in furnaces, stove vents, etc. when the homes are too well sealed.

The residential energy credit for installing solar water heating and electric equipment, geothermal heat pumps and small wind energy systems is still worth 30% of the cost of property placed in service through Dec. 31, 2016. There is no limit on the cost, or on your income, to qualify for this credit, taken in Part II of Form 5695.

Aside from improving your home, there are credits for improving your life. For things like adopting children, getting educated, saving for retirement, having children.

Some of the credits are refundable. That means, you will get the money released to you, even if the refund exceeds your tax liability. Non-refundable credits only reduce your taxes. You don’t get any money back. Many of the credits are reduced or eliminated if your income is too high, though. So they’re not for everyone.

Adoption credits

Adoption credits in 2011 are refundable and worth up to $13,360 per child ($12,650 in 2012 – non refundable), Use Form 8839. In addition to the credit, your employer may also pay a similar amount of your adoption costs without including it in your taxable income. To claim these credits or exclusions, you must have spent the money to adopt a child, as you might expect. However, when it comes to special needs children, you can receive the full credit and exclusion even if you haven’t spent that much money.

For domestic adoptions, you can claim the benefits in the year you spend the money, even if the adoption isn’t final yet. But not for foreign adoptions. The foreign adoption must be finalized to claim the tax benefits. IRS defines special needs children, and explains which children are eligible for both domestic and foreign adoptions, on their FAQ page. There is also an income limitation. The adoption credit and payroll exclusion phase out in this income range $185,210 - $225,210 this year ($189,710 – $229,710 in 2012).

The child tax credit

The child tax credit (non-refundable) comes with an additional child tax credit which is refundable on Form 8812. The credit is worth up to $1,000 per child. It is only refundable up to 15% the amount of earned income (wages or business profits) that exceeds $3,000. In other words, if someone has $50,000 in wages, their maximum credit may be $7,000 if they have 7 children. Or with wages of $20,000, they could get up to $2,550 with 3 children.

Other conditions: earned income must be at least $10,000. But you lose the credit entirely when adjusted gross income exceeds $75,000 (single), $110,000 (married filing jointly) or $55,000 (married filing separately).

Education credits

Education credits come in two flavors – refundable – the American opportunity credit (AOC) and non-refundable – the lifetime learning credit (LLC). Use Form 8863. They are both subject to income limits. The AOC phases out between $80,000-$90,000 for singles and between $160,000- $180,000 for couples filing jointly. The LLC has a lower threshold, phasing out between $51,000 - $61,000 for singles and between $102,000 - $122,000 for couples filing jointly.

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